Question

The income elasticity for selected products was found to be the following;

a) Movies: +3.4
b) Dental services: +1
c) Clothing: +0.5
d) Instant potatoes: -0.8021 Interpret these coefficients.

Answer 1

The income elasticity of demand for products such as movies, dental services, clothing, and instant potatoes indicates if they are normal or inferior goods and how responsive the demand for these goods is to changes in income.

Step-by-step explanation:

The income elasticity of demand measures how the quantity demanded of a good responds to a change in consumers' income. When this elasticity is positive, it indicates a normal good, meaning that as income rises, demand for these goods increases. Conversely, a negative elasticity represents an inferior good, which sees a decrease in demand as income rises.

1. Movies have an income elasticity of +3.4, which means they are a luxury good, as the demand for movies increases significantly more than the increase in income.
2. Dental services have an elasticity of +1, classified as a normal good, with proportional increase in demand to income.
3. Clothing with an elasticity of +0.5 indicates it is a normal good but with a less than proportional demand response to income changes.
4. Instant potatoes have a negative elasticity (-0.8021), suggesting they are an inferior good, with demand decreasing as income increases, perhaps substituted by higher-quality foods.